Crown American Realty Trust took the market by surprise when it slashed its quarterly dividend last week, leaving many to wonder which other real estate investment trusts might soon follow suit.
"Crown American swore earlier this year that its dividend wasn't at risk," said Steven Hash, a REIT analyst at Lehman Brothers Inc. The company reportedly told analysts and investors at an industry conference in March that the dividend was safe.But the investor in shopping centers based in Johnstown, Pa., said last Tuesday it substantially reduced its dividend to 20 cents a share from 35 cents, following in the footsteps of Tucker Properties Corp., a shopping-center investor based in Northbrook, Ill., that cut its dividend to 25 cents from 36 cents in June.
Crown made the move to grow internally, while Tucker said it hoped to reduce debt and make improvements at certain sites.
In a research report, Hash said several other REITs might not be far behind, and he identified seven companies that might be ripe for a dividend cut.
The REITs are Town & Country Trust, a Baltimore-based owner of multifamily properties; Paragon Group Inc., a Dallas-based apartment REIT; Alexander Haagen Properties Inc., an operator of shopping centers that's based in Manhattan Beach, Calif.; Mark Centers Trust, an operator of shopping centers, based in Kingston, Pa.; Kranzco Realty Trust, an operator of shopping centers, based in Conshohocken, Pa.; Mills Corp., a Washington-headquartered mall REIT; and Burnham Pacific Properties Inc., a San Diego-based owner of commercial properties in Southern California.
"The majority of REITs are driven by the real estate market, which is doing very well," Hash said in an interview. "And the vast majority of these companies have no risk at all. But some deals were just structured too aggressively, and these companies are going to have to cut the dividends now or later."
Hash's report said all seven, like Crown American and Tucker Properties, have high dividend yields and a payout ratio above 85 percent of expected 1995 funds from operations. A high payout ratio means that a REIT might not be covering its dividend after necessary cash reinvestment needs, Hash said.
According to Kevin Comer, a REIT industry analyst at Bankers Trust New York Corp., the average payout ratio in the REIT industry is 82 percent. The mall sector has the highest average payout, with 88 percent, while the office group is in good shape, with a ratio of just 69 percent.
"Generally, I think the payout ratios across the industry are fairly conservative, with major exceptions in the mall sector," Comer said. He points to Taubman Centers Inc., of Bloomfield Hills, Mich., which he thinks might have dividend risk because of its 95.7 percent payout ratio.
Jon Fosheim, a principal at Green Street Advisor Inc., a research firm based in Newport Beach, Calif., said Mills, Kranzco, Alexander Haagen, Burnham Pacific, Town & Country, Carr Realty, and Macerich also top his list of REITs with dividends that are in danger of being cut.
"That doesn't mean to say they can't pay the dividend," Fosheim said. "They're just not covering their dividends out of their cash flow. They aren't swimming in cash, and it would be a good business practice for some of them to cut their dividend."
Fosheim said if these companies don't reduce their dividend, they'll have to borrow money, sell assets, or go to investment bankers to get new capital.
"Though a cut would probably hurt them in the short run, it would be better long term," Fosheim said. "The only thing worse than a company cutting its dividend is a company not cutting its dividend if it needs to."
Mills Corp.'s president and chief operating officer, Peter B. McMillan, said the company will be able to cover its dividend beginning next year, after a development is expanded this November and a new development is brought on-line by the end of 1996. The company's payout ratio currently stands at 106.2 percent.
Town & Country, Mark Centers Trust and Taubman Centers all said they don't plan to reduce their dividends.